South Korea’s New Finance Chief Hyun Seen Capping Stimulus

Employees work in the dry dock at a shipyard in Ulsan, South Korea. South Korea’s economy expanded 2 percent in 2012, the slowest pace since annual growth fell to 0.3 percent in 2009. Photographer: SeongJoon Cho/Bloomberg

Feb. 18 (Bloomberg) -- South Korea’s newly-named finance
minister, Hyun Oh Seok, may set limits on the scale of fiscal
stimulus to spur growth even as a rising won adds to drags on
Asia’s fourth-largest economy.

Hyun cautioned last year against letting the nation’s
financial health deteriorate, while seeing room for additional
fiscal and monetary measures, according to local media reports.
The 62-year-old will also be deputy prime minister for the
economy under President-elect Park Geun Hye, her transition team
said in Seoul yesterday.

After advising the outgoing government as head of the Korea
Development Institute, Hyun now faces the challenge of helping
to bolster an economy that expanded last year at the slowest
pace since the global financial crisis. In a November report,
his institute said the government should ensure fiscal soundness
while implementing more expansionary policies and using monetary
measures more actively.

“Hyun will not open the floodgates for aggressive fiscal
spending as he can’t compromise the country’s fiscal health,”
Jeong Young Sik, Seoul-based chief researcher at Samsung
Economic Research Institute, said in a telephone interview.
“Given that Hyun has been a close aide to policy makers of Lee
Myung Bak’s government, I don’t expect him to make drastic
changes.” Lee will hand over to Park and her new administration
on Feb. 25.

Parliament Hearing

Cabinet appointees to Park’s new government, including
Hyun, are subject to a parliamentary approval at the National
Assembly, where Park’s New Frontier Party has a majority.

South Korean media are scouring Hyun’s background, a
process that derailed the nomination of Kim Yong Jun, Park’s
first choice to be prime minister, after allegations emerged
that his sons were involved in suspicious real-estate dealings.
Park later picked former prosecutor Chung Hong Won for the role.
The KDI yesterday issued a statement to say that a report
accusing Hyun of evading a gift tax was incorrect.

The won fell 0.6 percent to 1,084.35 per dollar at 12:10
p.m. in Seoul, according to data compiled by Bloomberg. It
strengthened 1.6 percent last week. The benchmark Kospi index
fell 0.4 percent to 1,974.34.

“The short-term challenge is how to secure a rapid
economic recovery,” Hyun said at a briefing in Seoul yesterday,
without commenting on the currency or fiscal stimulus. “The
long-term challenge is how to coordinate between growth and
welfare and improve our growth potential.”

Fiscal Health

In an interview with the Korea Economic Daily in July, Hyun
said the government should “refrain from a hasty supplementary
budget as deteriorating fiscal health may hurt our international
credibility and thus trigger foreign capital flight.” Rather
than printing money to boost the economy, it was more urgent to
encourage companies to invest, he said.

In an October interview with ChosunBiz, a unit of the
Chosun Ilbo newspaper, Hyun said policy makers should not use up
all available tools quickly in case the global economic slump is
prolonged, although he saw more room for fiscal and monetary
policy easing.

He argued against monetary tightening in May 2010, citing
escalating military tension with North Korea and Europe’s debt
crisis. Two months later, the Bank of Korea unexpectedly raised
interest rates to 2.25 percent from a record-low 2 percent.

Strong Power

“The new finance minister, now elevated to deputy prime
minister, will have unusually strong power, probably unseen
since Park Chung Hee’s regime, encompassing all economic
policies from budget to international trade,” Lee Sung Kwon, an
economist at Shinhan Investment Corp. in Seoul, said before the
announcement. He was referring to the incoming president’s
father, who oversaw South Korea’s economic rise through the
growth of automaking, steel and shipping until his assassination
in 1979.

GDP increased 1.5 percent last quarter from a year earlier,
less than analysts forecast, and a 25 percent gain in the won
against the yen over the past six months threatens to restrain
exports by aiding rival companies in Japan.

Hyun has a Ph.D. in economics from the University of
Pennsylvania and worked for the World Bank and South Korea’s
finance ministry before becoming head of the nation’s top
research body in 2009, according to KDI’s website. He has been a
policy adviser to the Bank of Korea and the government. One of
his predecessors at KDI was central bank Governor Kim Choong
Soo.

Greatest Responsibility

Becoming finance minister and deputy prime minister for the
economy “is the greatest responsibility of my career,
especially at a time when the global economy is in such a
difficult situation,” Hyun said yesterday. “I will contribute
to the new Park government’s commitment to revive the middle
class through the virtuous circle of growth and welfare.”

His predecessor Bahk Jae Wan resisted pressure from
lawmakers last year for additional spending to support growth,
submitting a 2013 budget that targets a fiscal deficit amounting
to 0.3 percent of gross domestic product, the lowest in six
years. Three global credit-rating companies upgraded the
nation’s sovereign rankings last year, citing fiscal soundness
and economic resilience.

“The new finance chief will face pressure to introduce a
supplementary budget as fiscal stimulus is set to play a bigger
role in Korea’s recovery,” Ronald Man, a Hong Kong-based
economist at HSBC Holdings Plc, said before the announcement.

72 Percent

Park’s government has allocated 72 percent of the budget in
the first half of the year, to aid a recovery. The new president
also promised to increase spending on welfare and unveil an 18
trillion won ($16.6 billion) fund to help avert loan defaults.
Park said in a New Year’s speech that she will focus on
improving people’s lives and “resolving the difficulties of the
poor and the needy.”

Park has vowed to spend 131.4 trillion won on welfare
programs such as free childcare and support for the indebted
poor over the next five years. Raising taxes is a “last
resort,” Park said in a televised debate on Nov. 26. A
supplementary budget is a policy card that can be used
“whenever needed,” the Seoul Economic Daily newspaper cited
her as saying in a Nov. 20 interview.

Economic Growth

South Korea’s economy expanded 2 percent in 2012, the
slowest pace since annual growth fell to 0.3 percent in 2009.
That compares with a potential rate of 3.8 percent estimated by
central bank governor Kim.

The Bank of Korea on Jan. 11 projected a growth rate of 2.8
percent for 2013, cutting its previous estimate of 3.2 percent.
It kept interest rates on hold at 2.75 percent on Feb. 14.

Policy makers also face a working population that’s
expected to start shrinking in 2017, according to a finance
ministry report last year.

“In the long term, Korea needs to outline a fiscal
strategy to slow the impact of an aging demographic” to keep
growth momentum, said Wai Ho Leong, a senior regional economist
at Barclays Plc in Singapore.